Consumer inflation worries may limit RBA options

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Consumer inflation worries may limit RBA options

By Chris Zappone

Consumers see price rises accelerating in coming months, a concern that may limit the ability of the Reserve Bank to lower interest rates, according to a new report.

The Melbourne Institute survey of consumer inflationary expectations index jumped to 3.3 per cent in April from 2.7 per cent in March. It was the highest reading since July 2011.

“If inflation expectations translate into actual inflationary pressures, the RBA may be caught in a policy dilemma,” said Melbourne Institute research fellow Dr Edda Claus. “[The RBA] may have to tighten monetary policy in times of moderate growth which puts further downward pressure on activity,” she said.

The central bank kept interest rates on hold last week at 4.25 per cent but acknowledged that the slowing domestic economy may justify another rate cut.

The RBA said it “judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy."

The market is currently pricing in a 90 per cent chance of a rate cut when the RBA meets on May 1. Official inflation rose by 3.1 per cent in the year to December 2011, slowing from 3.5 per cent in the year to September 2011, according to Australian Bureau of Statistics data.

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The next RBA rates decision will likely hinge on March quarter inflation data to be released on April 24.

The RBA seeks to keep inflation between 2-3 per cent. ABS jobs figures out today showed the economy added 44,000 jobs in March - seven times the number of positions expected by economists. The jobless rate remained steady at 5.2 per cent.

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